My last note on CBRL was titled ‘THE BRIDGE TO NOWHERE’ starting with the following quote:
“The definition of insanity is doing the same thing over and over and expecting a different result.”
I continued: “Year-to-date, CBRL has underperformed the S&P 500 by 19.55% and is now trading at 6.2x EV/EBITDA. Value or value trap? I think the latter. I really think CBRL’s management is unwilling to face reality. I listened to CBRL management team speak at the Goldman conference and I could almost not believe what I was hearing. I’m convinced that this concept is in a secular decline and the only way out will be very painful for shareholders. That said, anything’s possible; Trian might take another run at the company!”
Ok, so it was not Nelson Peltz, but last night a 13D was filed on CBRL by Sardar Biglari owning a 9.7% stake. The restaurant industry is an easy target for activist investors to push around bad management teams and CBRL is no exception to that rule. Sorry, Mr. Woodhouse; your track record speaks for itself, especially knowing that this is the second time you will be faced with an activist shareholder.
Sadly, the last time Mr. Woodhouse was challenged to create shareholder value he failed (see my table below) and, in fact, I have made the case that the concept is in secular decline. It could be argued that the company is in worse shape than it was in 2007.
In the 2006/2007, when CBRL faced Nelson Peltz, the stock peaked at $50.74. Given the secular decline I see in the concept’s business, I don’t see much value past the $50 level, because the cost of fixing declining traffic trends is both time- and capital-intensive. The questions investors need to ponder are: can Mr. Woodhouse fend off Mr. Biglari and what will he do to create value? Will he pursue the same path he did against Nelson Peltz?
Look no further that the 2007 proxy for Mr. Woodhouse’s success plans four years ago. It is plain for all to see how he benefited from the situation. Will he turn this current scenario into another big payday for himself? If history is any guide, he will.
From the 2006 proxy: “The Success Plan was adopted in order to reward certain key personnel, including certain executive officers of the Company and its subsidiaries, for undertaking and for various degrees of success in implementing the restructuring plan announced March 16, 2006. The restructuring (the ‘Restructuring Plan’) includes implementation of a modified Dutch auction style tender offer in an amount of at least $700 million and related financing (the ‘Tender Offer’) and divestiture of the Company’s wholly-owned subsidiary, Logan’s Roadhouse, Inc. (the ‘Logan’s Divestiture’) at one of two levels of proceeds (the ‘Target Level’ and the ‘Maximum Level’).
The Success Plan includes a $7.9 million bonus pool that will be paid to two groups of executives: the ‘CBRL Participants’ and the ‘Logan’s Participants’. It should be notes that Mr. Woodhouse collected $4.2 million or 53.1% of the ‘success fee’.”
As in 2006, my guess is that the street will focus on the real estate and the potential for a sale/lease back transactions to create value. To be clear, this has never worked and will not work this time. Bill Ackman has tried the strategy many times and it has never been proven to work. It can make for good headlines, but that is about it. This time around there is not another concept to divest. This only serves to highlight just how bad things are at CBRL today. The sale of Logan Roadhouse was supposed to allow the current management team to focus only on the performance of the Cracker Barrel concept. If traffic trends are a benchmark for the measurement of success, then it is important to note that traffic trends are significantly lower today than in 2007.
I let you be the judge of the company’s performance since the beginning of fiscal 2007. The store base has grown by 11%, sales by 2.3%, EBITDA by $3.4 million, EBIT has declined by $68,000 and the share price has gone nowhere. All the while, Mr. Woodhouse has pocketed approximately $37 million in total compensation over the same period.
Allowing that to sink in, the only word fit for print I can think of is “embarrassing”.
POSITION: no position SPY
In this morning’s Early Look note (“Bullish Bears”), I walked through why I thought this morning’s Global Macro Grind was bullish for the immediate-term TRADE duration in US Equities.
A market like this (bearish intermediate-term TREND, with resistance = 1320) can get Squeezy; particularly after it gets exhausted on the downside. After 6 consecutive down weeks, we’re probably going to see an up week –but the question remains, up to where?
- TRADE = 1312 – that would be a probable +3.3% Meltup
- TREND = 1320 – that would be more than a Meltup, if it were to hold
I am expecting #1, not #2, for now…
The hallmark of a great risk management is being Duration Agnostic. Downside support is now a higher intermediate-term low at 1262.
Manage your risk proactively,
Keith R. McCullough
Chief Executive Officer
Daily Trading Ranges
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Notable news items and price action from the restaurant space as well as our fundamental view on select names.
- WEN was raised to Buy from Neutral at UBS based on upside to SSS estimates in 2H (particularly in 4Q) based on the re-launch of the premium burger.
- WEN CEO Roland Smith said yesterday that the 2008 combination of Wendy’s and Arby’s has “absolutely not” been a failure.
- PNRA has launched a $40 million advertising campaign, called “Make Today Better” yesterday. Chief Marketing Officer Michael Simon called the effort Panera’s “most significant ad campaign to date”.
- CBRL Biglari Holdings Inc. has reported a 9.1% stake, according to a 13-D filed yesterday. The company plans to communicate with management and members of the Board regarding the business, governance, and future plans of the company.
- RUTH and DIN gained on accelerating volume yesterday. RRGB and KONA declined on accelerating volume.
The Macau Metro Monitor, June 14, 2011
ECONOMY TO GROW BY LOW DOUBLE-DIGIT: TAM Macau Daily Times
Secretary Francis Tam said the Macau economy is likely to experience a low double-digit growth this year. There are forecasts that call for a slowdown in 3Q, added Tam. Last year, the MSAR economy grew by 26.2% to MOP 217 BN. The secretary also acknowledged that yearly inflation – which hit 4.9% in April – is likely to remain high for the foreseeable future, considering the situation in mainland China and worldwide.
PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR APRIL 2011 DSEC
Visitor arrivals in package tours decreased by 5.0% YoY to 543,679 in April 2011. Visitors from Mainland China (408,461), Thailand (12,959) and Japan (9,233) decreased by 4.9%, 14.7% and 45.3% respectively. Visitors from Taiwan (27,491); Hong Kong (24,718) and Republic of Korea (18,546) increased by 11.9%, 9.4% and 23.5% respectively.
Hotels and guest-houses received 675,836 guests in April 2011, up by 1.7% YoY, with the majority coming from Mainland China (53.4% of total) and Hong Kong (20.9%). The average length of stay remain unchanged YoY at 1.4 nights. The average occupancy rate of hotels and guest-houses was 84.5%, up by 3.6% points YoY.
MAINLAND CONFIRMED INDIVIDUAL TOURISTS SCHEME WITH TAIWAN People's Daily
According to the State Council's Taiwan Affairs Office, a pilot plan allowing Mainland China visitors to Taiwan as individual tourists will commence on June 28, which covers residents from Beijing, Shanghai and Xiamen at the first stage. Currently, mainlanders are only allowed to visit Taiwan on package tours after the authorities lifted a partial ban in July 2008.
CHINA RAISES BANK RESERVE REQUIREMENTS Bloomberg
China's Required Reserve Ratio for banks will be raised to a new high of 21.5%, effective June 20. Also, China’s producer prices rose 6.8% in May and non-food inflation accelerated to 2.9%, the fastest pace in at least six years.
TODAY’S S&P 500 SET-UP - June 14, 2011
The three things that matter this morning:
- Deflating The Inflation (our Q2 Macro Theme) was big yesterday = CRB Index down -1.1% on oil down hard
- Chinese Data for May was rock solid sequentially = Fixed Asset Investment up 40bps sequentially in May to +25.8%
- Global Equity Markets stopped going down
Bulls are dying for some bullish data to cling to at this point and, if you look hard enough, it's there today - what price do you pay remains the question. In SP500 points, I say just relax and manage risk around the range (1)
Being perma anything won't work in 2011. As we look at today’s set up for the S&P 500, the range is 31 points or -0.94% downside to 1259 and 1.90% upside to 1290.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: -468 (+1452)
- VOLUME: NYSE 908.34 (-10.89%)
- VIX: 19.61 +3.98% YTD PERFORMANCE: +10.48%
- SPX PUT/CALL RATIO: 1.67 from 1.77 (-6.13%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 19.95
- 3-MONTH T-BILL YIELD: 0.05%
- 10-Year: 3.00 from 2.99
- YIELD CURVE: 2.60 from 2.58
MACRO DATA POINTS:
- 7:30 a.m.: NFIB Small Business Optimism, est. 90.5
- 7:45 a.m./8:55 a.m. ICSC/Redbook Weekly Sales
- 8:30 a.m.: Producer Price Index, est. 0.1%
- 8:30 a.m.: Retail sales, est. (-0.5%)
- 10 a.m.: Business inventories, est. 0.9%
- 11:30 a.m.: U.S. to sell $28b 4-wk bills
- 2:30 p.m.: Fed Chairman Bernanke speaks at the Committee for a Responsible Federal Budget Annual Conference
WHAT TO WATCH:
- Nokia and Apple agreed to settle all patent litigation between the companies in a deal that awards a one-off payment and royalties to Nokia
- BofA “significantly hindered” a federal review of its foreclosures on loans insured by the FHA, U.S. says
- U.K. inflation held at the fastest pace since October 2008
COMMODITY HEADLINES FROM BLOOMBERG:
- Sugar Rising as Thailand Port Congestion Worst in Memory: Freight Markets
- Michael Coleman’s Trading Company Hires Ex-JPMorgan Coal Trader Chan Bhima
- Cotton Acres in China Seen Capped as Manufacturing Jobs Lure Farm Workers
- Record Corn Crop in India May Help Increase Exports, Limiting Global Costs
- Fees Punish Savers Seeking Hedge-Fund Cachet in Commodities Futures Funds
- Crude Oil Trades Near One-Month Low on Demand Outlook for China and U.S.
- Corn Drops for Third Day as Weather Improves, Pre-Export Inspections Fall
- Copper Climbs for First Day in Three as China Production Maintains Growth
- Sugar Falls on Reduced Concern About Brazilian Supply; Coffee Prices Drop
- Gold May Advance on Inflation Concern, Sovereign-Debt Crisis in Europe
- Violent Protests Increase at Chile’s El Teniente Copper Mine, Codelco Says
- Chicken Breeders Face Tax-Cut Hawks in U.S. Senate Showdown Over Ethanol
- Sino-Forest’s Investors Will Question Executives After Stock Plunges 73%
- EUROPE: another dead cat bounce on hope of Keynesian resolve? DAX up +1.6% (we're long); Spain +1.4% (were short); Greek stocks, no dice
- ASIA: better than bad; China rallies on "news" that inflation hits a new high; Hang Sang fails to confirm (down -0.05%); India +0.27%
- China May CPI +5.5% y/y, matching expectations. May PPI +6.8% y/y vs cons +6.5%.
- Japan April capacity utilization (1.1%) m/m. Revised April industrial output +1.6% m/m vs prelim +1.0%.
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